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Original Source: FD (FAIR DISCLOSURE) WIRE
. John Eudy, Essex Property Trust, EVP, Development . Mike Schall, Essex Property Trust, COO . Mike Dance, Essex Property Trust, CFO
. Brian Legg, Millennium Partners, Analyst . William Aikman, Merrill Lynch, Analyst . Craig Leupold, Green Street Advisors., Analyst . David Harris, Lehman Brothers, Analyst . John Lopez, Essex Property Trust, Accounting Manager . Karin Ford, Banc of America Securities, Analyst . Keith Guericke, Essex Property Trust, VP, CEO
The Co. reported that FFO for 1Q06 totaled $28.9m or $1.13 per diluted share. FFO guidance for 2006 has been revised to $4.75-4.87 per diluted share.
A. Key Data From Call 1. 1Q06 FFO = $28.9m. 2. 1Q06 FFO = $1.13 per diluted share. 3. 2006 expected FFO = $4.75-4.87 per diluted share.
S1. 1Q06 Review (K.G.) 1. Highlights: 1. The Co. on 05/03/06, reported another strong qtr. of FFO of $1.13 per share. 2. For 1Q06, the portfolio grew revenue at 5.4% greater than 1Q05, and 1.3% on a sequential basis. 3. Outlook on the Co.'s markets is based on continued strong GDP growth and improved job growth at the national level. 4. The improvement in the national economy has translated directly into the markets. 5. The industry survey indicated the Co.'s markets added 185,000 jobs or 1.5% as of Dec. '05. 1. Recent data through March shows YoverY growth of 230,000 jobs, or 1.9%. 2. Unemployment in the Co.'s markets continued to fall. 3. Household survey revealed in 4Q05, an unemployment rate of 4.7% in the markets down from 5.4% last year.
4. During this period, the labor force grew 1.1%. 5. Much of this improvement has come from northern California and the Pacific Northwest. 2. Seattle: 1. The Co. continued to see strong job growth. 2. YoverY growth in industry jobs was 52,000 jobs through Dec. '05. 3. In March it had increased to 58,000, or 4.3%.
1. This growth was helped by 7,000 new Boeing jobs, plus an acceleration of hiring at Microsoft. 4. New supply forecasts for 2006 remains low at 11,000 single-family and 2,300 multi-family homes. 1. This includes condos, for a total supply of 1.2%.
2. The ratio of job growth to supply for this market is the highest in the nation. 5. The Co. has increased the Seattle forecast.
1. The Co. now expect market occupancy to increase to 95.5%, a 25 BP increase, and effective rent growth of 6%, which is a 200 BP increase. 3. Northern California: 1. The Co. has seen YoverY job growth of 30,000 jobs through Dec. '05. 2. As of March, that has increased to 43,000 jobs or 1.5%. 1. The improvement has occurred across all three MSAs. 2. The unemployment rate for 1Q06 was 4.5%. 3. Job growth now exceeds new apply. 1. The forecasted supply for the region is 10,000 single-family and 7,000 multi-family permits, again including condos, for a total increased supply of 0.9% of the existing stock. 4. In these markets the Co. has increased expectations. 1. The Co. is expecting occupancy to actually remain in the 95.5-96.0% depending on the sub market but it has increased effective rent growth forecast in San Francisco from 4.5% to 6%, in Oakland, from 3.5% to 5%. 1. The Co. is maintaining the expectation of 4% effective rent growth in San Jose. 5. Northern California still has room for considerable growth. 1. The public tech sector continues to show strong growth in profits.
2. There remains significant commercial spaces to support new
jobs. 3. The combined MSAs have 34.3m sq. ft. of office space, 30.1m sq. ft. of R&D space and 35.7m sq. ft. of industrial space
available. 4. Given this, the Co. doesn't anticipate a job explosion like it saw in the late 90s. 4. Southern California:
1. YoverY growth in industry jobs was 75,000 through Dec. '05.
1. As of March that had increased to 102,000, or 1.5%. 2. The improvement was strongest in LA and San Diego counties. 3. The unemployment rate for the region was 4.6%. 4. Forecasted supply for the region is 26,000 single-family units and 19,000 multi-family units, which accounts for 0.8% of existing stock. 5. The Co. is maintaining expectations for rent growth in this region at the 3.0-4.5% range depending on the sub market. 5. Cap Rates from an Acquisition Standpoint: 1. Southern California range is somewhere between 4.75-5.25%. 2. Northern California continues to be very aggressive at 4.25-5.0%. 3. Seattle is fairly consistent with numbers the Co. talked about in the past, 4.5-5.0%.
1. Given the aggressive cap rates on the acquisition side, the Co. is seeing development cap rates make a lot more sense today.
4. On today's rents and expenses, again trying to keep apples-to-apples, the Co. is seeing cap rates on developments in the 6.0-6.5% range. 1. Comparing that to the acquisition cap rates, the Co. thinks that the risk premium is there and to be more aggressive on
the development side. 2. Comparing 6.25% cap rate on the development today vs. a 5% cap rate on acquisition, that represents a 25% premium.
3. So, clearly there is a development premium here. 5. Starting with this quarter's supplement package, the Co. is expanding the detail on the development pipeline to be more consistent with peers reporting. 1. This pipeline has been building for the last two or three years.
S2. Market Development (J.E.) 1. Highlights: 1. For the last 20 years development has been a significant part of the Co.'s strategy. 2. Development yields produced an attractive external growth within the Co.'s targeted supply constrained markets.
1. The Co.'s job is to mitigate the risk and manage the amount
of the investment exposure to a minimum until the date it has secured entitlements and construction start date is imminent. 3. The Co. manages its exposure very carefully to market changes. 4. In modeling current economic cap rates to the targeted stabilization rate, the Co. uses an avg. of 5% growth on rents, 3% on OpEx and 10% on construction costs. 1. These assumptions drive the stabilized …